ShmoopTube

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Finance allah shmoop what is cost basis or set another

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way What is the basis for tax purposes of your

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cost in this stock or this investment Like you bought

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a stock a twelve bucks chair and now it's a

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thirty and you go to sell it So really why

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does all this matter One word yet our beals above

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word rhymes with smacks is so when a company or

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an individual cells something while there are three outcomes the

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asset either made money lost money or broke even if

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it broke even there's Nothing to do no tax to

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pay no paper to be filed ever been pointing out

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the cost bases was in fact the net sales price

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for the whatever but for gains Well where there are

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a lot of taxes to pay the cost basis matters

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a lot Think about a share of coca cola your

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grandpappy bought in nineteen eighty for about a dollar a

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share It's trading at fifty one dollars a share now

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so happy jed has a fifty dollars a share gain

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that he would realize meaning get taxed on if he

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sold that coke stock and turned it into cash will

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His cost basis was a dollar a share and his

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gain is taxable Gain was fifty bucks a share and

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at a long term tax rate of about forty percent

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in a blue state that would be twenty dollars in

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tax on that fifty dollars of gain and ouch Yeah

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After that sale for fifty one dollars a share of

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coke he'd be left with only thirty one bucks in

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his pocket Enormous tax Painful so painful in fact that

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his gain is so much with his cost basis so

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low Well that pappy jet is highly incentivized to never

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sell that share of coke at least not unless he

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absolutely has to In the math here is painful At

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fifty one bucks a share coke will earn three bucks

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a share this year and three fifty next So if

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he nets thirty one dollars a share in his pocket

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after the sale well then he's essentially selling coke polo

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one of the premier companies in the world at thirty

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one over three fifty or just about nine times forward

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earnings which is just a crazy low cheap price for

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one of america's premier growth companies right And yes it

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works the other way around too And no not like

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that Had he bought shares of yahoo right its peak

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at two hundred bucks a share and then held it

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a decade so that it was down teo little forty

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dollars a share Amongst that being ali baba he could

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realize attacks lost of one hundred sixty dollars a share

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by selling it And that loss and a forty percent

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tax rate marginal tax rate kind of tax rate world

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is actually worth a lot in offsetting tax gains or

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tax savings of point four times one sixty or sixty

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four dollars a share in tax savings Like you khun

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shelter gains by realizing losses Welcome to america So yeah

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there's a perverse relationship with pressure toehold versus pressure to

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sell when stocks do really well it's painful to sell

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them because taxes take such a huge bite out of

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your net gains and the opposite is true as well

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When you lose money on a stock well you're highly

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incentivized to sell that loser shelter gains on your winners

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and we'll just move the hell on Want to see

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something really freaky Right Go into the bathroom Turn off

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The lights and say the word tax me uncle sam

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Three times Just a word of warning though We want

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to keep a firm grip on your wallet If you 00:03:28.835 --> [endTime] do that there

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